JP Morgan's analysis of the global semiconductor supply chain's second-quarter earnings has revealed a distinctly bullish signal: industry demand is stronger than it was three months ago, and pricing power is substantively "diffusing upstream."

According to a report released on August 17, JP Morgan systematically reviewed the core signals from the April-June quarterly reports of the world's major chipmakers. The findings are highly consistent and directionally clear: demand strength has comprehensively surpassed expectations from three months ago, and the trend of price increases is accelerating its "diffusion" from memory chips to semiconductor production equipment (SPE) and materials sectors.

The report states that the most critical change in the underlying logic is that price increases and profit expansion are no longer the exclusive privilege of memory chip manufacturers. Semiconductor production equipment (SPE) and technology materials suppliers are steadily improving their gross margins through price hikes.

Driven by robust demand, wafer foundry giants like Taiwan Semiconductor Manufacturing and Intel are comprehensively raising their capital expenditure (Capex) plans. Equipment manufacturers have significantly revised their market expectations for wafer fabrication equipment (WFE) upwards. Meanwhile, memory giants are securing their profit base for the coming years through long-term agreements (LTAs) of up to five years and substantial upfront payments.

Capex Hikes and Accelerated Advanced Capacity Expansion

Driven by strong demand, the world's leading chipmakers are intensively raising their capital expenditure plans. Funds are primarily flowing into the more expensive front-end equipment, while demand for back-end equipment is also experiencing steady growth.

Taiwan Semiconductor Manufacturing has raised its capital expenditure plan for calendar year 2026 (CY2026) by approximately 15%, from $52-56 billion to a significantly higher $60-64 billion (a year-on-year increase of 52% based on the midpoint). Of this, 70-80% will be allocated to advanced process technologies. Management has explicitly stated it is working closely with SPE manufacturers to ensure equipment supply does not become a capacity bottleneck.

Intel has raised its CY2026 capital expenditure plan from flat year-on-year (around $18 billion) to $20 billion (an 11% year-on-year increase). Equipment capital expenditure is expected to surge 40% year-on-year, with further significant growth anticipated in CY2027. The funds are primarily directed towards front-end equipment in the United States, alongside increased investment in back-end equipment related to EMIB-T. Its 18A node is slated for mass production by the end of 2026, with the 14A node planned for risk production in the second half of 2027 and mass production in 2028.

SK Hynix announced a CY2026 capital expenditure plan of 40 trillion Korean won (a 45% year-on-year increase) and has accelerated the mass production ramp-up for M15X. The cleanroom for Yongin Fab 1 is scheduled to be operational in early 2027. At Samsung Foundry, Taylor Fab 1 is on track to start production and gradually ramp up 2nm capacity in 2026, while Taylor Fab 2 is planned to break ground this year for mass production in 2030.

Upward Revisions and Price-Driven Margin Expansion for SPE

Compared to three months ago, the market outlook for wafer fabrication equipment (WFE) has become much clearer. JP Morgan believes that equipment makers are not only seeing a larger total addressable market but are also successfully passing on costs and boosting gross margins through a "value-based pricing strategy" (i.e., price increases).

Market size expectations for WFE have been comprehensively raised. Tokyo Electron has revised its CY2026-27 WFE market forecast from $150-170 billion to no less than $150 billion for CY2026 and no less than $190 billion for CY2027. Both Lam Research and KLA have raised their CY2026 expectations to the low end of the $150 billion range. SCREEN Holdings has raised its CY2026 forecast (primarily for memory chips) to year-on-year growth of over 20% (at least $140 billion).

The demand density driven by AI is increasing. Lam Research noted that due to the rising share of semiconductors in AI infrastructure, the estimated WFE demand corresponding to every $100 billion in AI investment has been revised up from approximately $8 billion to $9-10 billion.

Gross margin expansion is a core profit signal. Tokyo Electron expects its gross margin to reach 50% in early fiscal 2027 (up from 47% in April-June 2026) through measures like price increases. Lam Research's second-quarter gross margin reached 52% (up from 50% in Q1), with a target of achieving 55% by offering high-value-added products. Applied Materials has seen its gross margin increase by approximately 300 basis points over the past three years, primarily attributed to a successful value pricing strategy, with its semiconductor systems division gross margin now exceeding 55%. KLA plans to increase prices by adding more value to new products, with expectations for its profit margin to rise as it enters 2027.

JP Morgan believes that the continuous upward revision of WFE market forecasts, combined with the tangible improvement in equipment makers' gross margins, implies that the earnings resilience of the semiconductor equipment industry is being systematically underestimated.

Indium Phosphide (InP) Substrate Supply Gap Exceeds 30%

In the technology materials sector, Indium Phosphide (InP) substrates are facing extreme scarcity, prompting suppliers to aggressively expand capacity and shift to larger 6-inch wafers.

The supply-demand imbalance is severe, with both Lumentum and Coherent reporting stronger-than-ever demand. Lumentum has indicated that the current supply-demand gap exceeds 30%. As InP substrate supply is the biggest constraint, both companies have signed long-term agreements (LTAs) with AXT Inc.

Capacity expansion is happening by multiples. JX Advanced Metals plans to increase its InP substrate capacity by 7 to 10 times by 2030. AXT Inc aims to triple its capacity year-on-year by the end of 2026 (targeting $60 million in quarterly sales) and more than double it by the end of 2027 (to over $130 million).

In terms of technology and cost optimization, Coherent is transitioning to 6-inch substrates, which can quadruple output, halve costs, and maintain high yields compared to 3-inch wafers. AXT Inc has also made significant progress in the development of technically challenging 6-inch substrates.

Details of Memory Chip LTAs Revealed, Prepayments Secure Future Profits

Global memory chip manufacturers are gradually disclosing the details of their long-term agreements (LTAs). JP Morgan believes these agreements are not only long in duration but also include substantial upfront payments, significantly reducing the risk of price volatility and providing core support for the valuation re-rating of memory giants.

Samsung Electronics has finalized five LTAs with data center customers, with another five in the final stages of negotiation. The contracts are based on a rolling 5-year term and are expected to involve substantial upfront payments. SK Hynix has signed 10 contracts, based on a 5-year term with upfront payments, aimed at using the agreements to reduce price volatility.

SanDisk has signed eight contracts (three of which are with US hyperscale cloud providers) with an average term of four years (maximum five years). Some customers have already inquired about contracts exceeding five years. These contracts, typically backed by upfront payments, cover 50% of SanDisk's bit demand for fiscal 2027 and approximately two-thirds of its demand for fiscal 2028.

A staggering profit floor was revealed. SanDisk management has disclosed that even at the floor price of its variable pricing structure (which includes price caps and floors), its gross margin can still reach approximately 80%.

The report points out that the accelerated signing of LTAs provides a "floor price" protection for the profitability of memory chip makers. The detail disclosed by SanDisk, "a floor price corresponding to about 80% gross margin," is particularly critical, suggesting that profitability has strong support even under the most pessimistic pricing scenario. As more LTA details are disclosed, the logic for a valuation restructuring of the memory chip sector is expected to gain increasing market recognition.